All Eyes on Cadence………….

I just spent the last hour+ listening to to Cadence Q2 earnings conference call. (You can listen to the call here and read the transcript here).

Ouch!!!

As I write this at 12:30AM PDT on Thursday morning, I don’t know for sure how the markets are going to react. But I expect, as do all of the analysts, that Cadence shares will be down. Here are the lowlights that I took away:

1) Cadence revised their revenue and earnings guidance for 2008, not by a little, but by a lot. Analysts were projecting ~$1.5B revenue and Cadence is now projecting ~$1.1B, or ~25% less. (Note: This is in part due to a change in license mix as described below).

2) Cadence is increasing it’s license mix to 90% ratable going forward. Simply put, more of their revenue will be recognized over time rather than up-front (at the time of the booking).  That means lower revenue in Q3, although by design. (Note: This is the same thing that Synopsys did when it missed a quarter badly several years ago.  The change in license mix helps to obscure the real financials to the investment community. Bottom line: if you have bad news, put it all in one quarter).

3) Cadence has started the regulatory approval process and acquired 4.7% of Mentor common stock in the open market and they say they are committed to the acquisition, but Mentor has not returned any calls.

So, how did the analysts react? Not well.

Much of the analyst part of the call was devoted to cordial debate over whether this “weakness” was due to poor economic conditions, economic uncertainty, and delayed migration to new technology nodes within the customer base (as Cadence contends) or to a more inherent weakness in Cadence’s business (as the analysts seemed to believe). For instance, one analyst asked “did the environment deteriorate that quickly that your bookings outlook could have gone from $1.5 billion down to $1.1 billion in one quarter?”

There also seems to be a belief that Cadence “over-consolidated”. When they did “all-you-can-eat” deals with some big companies, they basically “drained the pipe”, leaving them without an option to sell new technology.

And customers are just holding out and deferring purchases until they get a better deal.

There was also quite a bit of discussion concerning EDA Cards which represent half of Cadence’s business. Customers are demanding even more flexibility in when, what, and how they purchase software and hardware.

Lastly, Cadence will continue to look at expenses, i.e. expect some attrition.

Bottom line: No way to sugar coat this…it was a rough quarter and figures to be a rough year for Cadence.  Question is how much will Cadence be punished by the investors and how much will their EDA brethren (Synopsys, Mentor, Magma, etc.) be punished. We’ll find out tomorrow.

harry the ASIC guy

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